Shipping’s extreme consolidation could prolong supply chain pain

Date: Wednesday, November 10, 2021
Source: Freightwaves

U.S. policymakers have never been more focused on global container shipping than they are today. Yet the “steel” of this industry — the ships and the containers — is outside of U.S. control, consolidated into the hands of an extremely small circle of non-U.S. companies that continue to bolster their market shares. The big keep getting bigger.

Olivier Ghesquiere, CEO of container-equipment lessor Textainer (NYSE: TGH), summed up the situation during his company’s quarterly conference call.

“The question we always get is: How long will this last? In my opinion, it’s really about consumer demand that’s running very high and this can only be resolved in two ways: either by consumer demand coming down a bit or with infrastructure investment increasing. And as you can guess, infrastructure investment takes a long time.

“So our view is very much that this environment is here to stay for some time, and because of that, we’re unlikely to see a change in behavior of the various players in the industry.”

No incentive to change behavior

Three main decision-making groups steer vessel and equipment pricing and availability: shipping lines, which offer freight rates and purchase and lease ships and containers; container equipment lessors, which order new boxes and offer leasing rates; and container factories, which offer the prices for newly constructed boxes.

Only a handful of companies control capacity in each of these three groups. And in each case, the current market situation is enormously profitable, removing incentives to compete more on price.

According to data from Alphaliner, the top eight liner companies now control 81% of global capacity. Ghesquiere noted that prices obtained by shipping lines “are extremely high … [and] there is still plenty of cargo waiting to be shipped in Asia, so shipping lines really are in an environment where there is absolutely no need to change their behavior.”

The same goes for container equipment factories, virtually all of which are in China. Following recent consolidation, the top three Chinese builders produce 83% of all new boxes. “They are charging expensive prices for their containers,” said Ghesquiere. “They have a vested interest in maintaining the high pricing levels, so we really can’t see why manufacturing prices would drop. They have no incentives to change behavior.”

The pattern repeats yet again in the container-equipment leasing sector. Following recent consolidation, the top five players control 82% of the world’s leasing capacity. “Likewise, there is no risk here that the major players would suddenly change their behavior,” maintained Ghesquiere.

Add it all up and it equates to a grand total of just 16 companies — eight liners, three factory groups and five box lessors — that control over 80% of container-ship capacity, box-production capacity and box-leasing capacity. Shareholders of each of these 16 companies would benefit financially if today’s high pricing persists.

Ocean carrier consolidation

Ocean carriers have been busy placing orders for new ships, whether directly on their own accounts or indirectly through chartered tonnage ordered by vessel-leasing companies. The orderbook has more than doubled since last year, but the new ships won’t hit the water until 2023-24, offering no relief to U.S. cargo shippers in 2022.

As the new ships are being built, leading liner companies are acquiring secondhand tonnage, further consolidating the market.

[Read from the original source.]